Strangle Broken

Last week the SPX followed followed my guidelines almost perfectly - until the last hour of trading on Fri.  Last week's SPX option OI showed the potential for a strong rally Mon with large put support at 3940 and the day started out strongly with a rise into mid-aft to 3955 before closing at support at 3941.   With an expected range for the next two weeks of 3850-3950 based on the large EOM call OI at 3900, the SPX began to pullback, falling to a low Thur AM at 3854 and began to rally.  Reaching 3945 by mid-Fri. a pullback began to 3915 before an explosive rally began, up 40 SPX pts the last hour.

What happened?  I remembered reading earlier in the week about a potential gamma-related short squeeze due to falling VIX discussed by Nomura's C.McElligott at ZH.  It's a little bit over my head, so don't be surprised if you don't understand all of it.  Then again late Fri, they came out with another report predicting a large rally on Mon 29th targeting the SPX 4000 area, and likely what we saw was front-running and/or short covering by their clients before it was released to the public on ZH premium.  In case you haven't noticed, both ZH and MW have starting using "premium" releases, but a quick google of the title will show links to free versions.  The second part of their forecast is the "crash up, crash down" similar to their mid-Feb forecast.  I am willing to move my range up to SPX 3900-4000, but I still think it is still too early for a "crash".

This week in Tech/Other see an update of the aa mining composite put-call indicator and a possible volatity indicator.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment increased slightly last week, but remains near its lows.

 

The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C [ETF Puts/Equity Calls], outlook two to four months) bearish sentiment also increased slightly last week, but remains near its lows.

Bonds (TNX).  Bearish sentiment in bonds has fallen significantly even though rates remain near recent highs, indicating that the highs are not likely to hold INT.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment was relatively unchanged.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) bearish sentiment fell sharply last week as options call speculators look at every dip in prices as a BTFD oppty.  Not good LT.

And the sister options Hedge Ratio bearish sentiment fell slightly last week providing weak support for the market.

III. Options Open Interest

Using Thur closing OI, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected. Delta hedging may occur as reinforcement, negative when put support is broken or positive when call resistance is exceeded.  This week I will look out thru Apr 1, markets are closed for Good Fri Apr 2. Also, this week includes a look at the GDX for Apr exp. 

With Fri close at SPX 3975, options OI for Mon is mixed with moderate put support at 3900 and call resistance at 4k.  Put support at 3950 may allow a move to 4k, but a break below could fall to 3925.

Wed EOM has somewhat larger OI where SPX strangle collar at 3900 appears broken and call resistance at 4K is likely to provide strong resistance.   SPX 3950 or lower is possible.

With SPX somewhat ambiguous for Wed, I decided to take a look at the SPY ETF OI where SPY at 396 (1/10 SPX less div payout diff) has large call resistance at 395 that will likely put downward pressure on prices.

For Thur there is only light OI, but it is indicating lower prices for the SPX toward 3925-50.

For Mon Apr 5, my biggest argument against a "crash" following Fri jobs report as speculated by Nomura is the higher put support at SPX 3900, although a pullback below 3975 looks likely.

For EOM Apr 30, it's too early to draw strong conclusions, but the most obvious symptom is that unlike prior months which showed OTM put support, now we see a switch to OTM call resistance (a likely cause of VIX dropping) as call option buyers are becoming overconfident.

Using the GDX as a gold miner proxy closing at 32.7, put support at 31.5 and 32.5 may provide a slight upward bias with call resistance at 33.6 and 34.5.

Currently the TLT is 136.7 with the TNX at 1.66%, as forecasted rates seem to be consolidating between 1.6 and 1.75%.


IV. Technical / Other

This week I want to take a look at a couple of the data mining indicators - the Composite Put-Call indicator (Equity+ETF+SPX) and a volatility indicator.  First the Composite Put-Call indicator, I'm sure that many doubted the positive implications when I first showed this several weeks ago, nut so far it has proven accurate and has only now dropped to neutral, several weeks away from a Sell.

This is the equivalent using the composite with EMAs.

This is the ST composite with EMAs.  We appear to be at the same level as late Dec 2020, 1 month before the Jan top.

This is a volatility indicator using the VIX Buy & Sell (SKEW + VXV/VIX) and VIX Put/Call.

This is the ST volatility indicator with EMAs.  Here, we are the same level as the Jan top, but not close to the level before the larger declines in Sept and Oct 2020.

Conclusions.   Bearish sentiment continues to nosedive in the options marketbut enough hedging seems to exist to support the markets ST.  The overall outlook of a rounded top that may stretch over several more months still seems more likely than the melt up-melt down scenario, but identifying an exact top remains elusive.  

Weekly Trade Alert.  Prices may continue higher on Mon, but a breakout over SPX 4k seems unlikely.  Fri late rally could be due to Nomura's forecast of a ST gamma squeeze that targets SPX 4k, but a pullback toward 3900 may follow. Updates @mrktsignals.

Investment Diary,  Indicator Primer,
 update 2020.02.07 Data Mining Indicators,
 update 2019.04.27 Stock Buybacks,
 update 2018.03.28 Dumb Money/Smart Money Indicators

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Fed-a-Palooza

I have to start paying more attention to FOMC meetings.  As an economist, I ignored all the hype about "yield curve control" without realizing that it was just a bull trap.  As a result Wed saw the SPX hit my INT/LT target of 3980-90 and then reversed sharply with the rise in TNX over 1.75% and the late selloff in the NDX.  The Sell for the BKX was timely since it ended down 1.5% for the week even with higher int rates.  The subsequent decline to SPX 3886 probably means a trading range for the rest of the month between 3850 and 3950.

Unfortunately, we did get the high vol day Fri, but with prices on the downside, it was hard to tell if it was accumulation or distribution.  One possibility is a retest of the highs in Apr, a 6-7% decline in May, then a rally back over SPX 3950 in June before a larger downturn.  The June TLT options OI seems to indicate a potential int rate consolidation that could support the SPX thru June.

In the Tech/Other section this week I look at some ST indicators using the EMA averages recently added to the data mining software.  The new options put-call indicators were little changed and should be covered next week.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment surprisingly fell last week, although the swiftness of the post-FOMC may have caught bears off guard.

The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C [ETF Puts/Equity Calls], outlook two to four months) bearish sentiment was down much less for the week.

Bonds (TNX).  Bearish sentiment in bonds surprisingly dropped even as rates rose to new highs for the year, possibly due to stock volatility, hitting the 1.75% target mentioned previously.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment fell sharply as prices rose modestly as expected.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) bearish sentiment also fell sharply. now at the level seen prior to the Jan pullback.

However, the sister options Hedge Ratio bearish sentiment fell early in the week but did bounce back on the late week selloff.  See Tech/Other for a ST close up.

III. Options Open Interest

Using Thur closing OI, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected. Delta hedging may occur as reinforcement, negative when put support is broken or positive when call resistance is exceeded.  This week I will look out thru Mar 26. Also, this week includes a special look at the TLT for Apr and Jun exp.

With Fri close at SPX 3913, options OI for Mon shows moderate put support at 3900 and 3940 and seems to indicate a strong bounce to start the week up to the SPX 3940 level.

Wed has smaller OI where SPX has call resistance at 3950 and put support at 3850, in between are mostly hedged positions with a slightly positive bias up to 3900. A move back down toward 3900 is possible.

For Fri there is a very large straddle at SPX 3900 with a net put (positive) bias of 5000 that should keep prices above that level. SPX 3900-50 is mostly straddles with only a slight positive bias and call resistance above 3950.

For the EOM, the large strangle at SPX 3550 and 3900 is still likely to push prices below 3900.

Currently the TLT is 134.7 with the TNX at 1.73%, at this point it is difficult to tell if the large put position at 125 & 130 are smart or dumb money, now that the investing community has recognized the trend of rising rates.

To try to clarify, I decided to look at the EOQ for June since the EOQ seemed to be the "smart money" from previous quarters.  Here, we see a large range of high put positions extending from 125 up to 145 with almost no call resistance.  My take on this is that the puts are likely to provide support in the 130 to 135 range, or stabilize near current levels.

IV. Technical / Other

This week I want to look at a new feature added to the data mining software, the ability to use ST EMAs as a move one step closer to replacing the original program. This includes "close ups" of the DM/SM options indicator and hedge ratio, and the ST composite indicators Smart Beta P/C and VXX $ vol.  The following is to show compatibility with the regular DM/SM indicator.

The ST DM/SM options indicator from July 2020, shows a downward trend similar to July 2020 and Jan 2021 that may indicate several more weeks before a sharper downturn.

The ST hedge ratio remains near neutral and is likely to see lower levels before a sharp downturn.

The ST Smart Beta P/C is even more positive and suggests more of a rally, possibly to retest ATHs before a sharp decline.

The ST VXX $ Vol is in a moderately rising trend, but seems to be a better indicator of bottoms than tops and even then shows spikes on the first leg down about half the time.

Conclusions.   My oulook last week was topsy-turvy as the market's direction followed the exact opposite of int rates, but the expectation of a rally over SPX 3950 before a move below 3900 was correct.  I see little contradicting the outlook for a rounded top, but with last week's high of 3984 within the 3980-90 target range, the INT top may be in, although a challenge of that high is likely in Apr.  Otherwise, the remainder of Mar is expected to pivot around 3900, roughly in a range of 3850-3950.

Weekly Trade Alert.  A rally back to SPX 3950 is possible early next week with a decline expected to about 3850 by EOM.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,
 update 2020.02.07 Data Mining Indicators,
 update 2019.04.27 Stock Buybacks,
 update 2018.03.28 Dumb Money/Smart Money Indicators

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Onward and Upward

Not a lot to discuss this week.  As expected, int rates stabilized and a result the NDX rallied, missing the lower retracement target of 13.2k by less than 100 pts.  With the techs and industrials rallying, the SPX was pushed to new ATHs by +10 pts at 3960 before backing off.  The May 2015 analog remains in play with last weeks ATH possibly corresponding to the late Apr ATH.  If so, a two week pullback of about 3% should follow into the EOM and starting after Fri optn exp.

The only sentiment change of significance is a decline in the Hedge Ratio from higher levels that have supported recent rallies.  In the Tech/Other section, I discuss two indicators that seem to point to a Sept-Oct 2018 type top, where we saw a high volume (distribution) top on Sept triple witching optn exp followed by a small pullback and a slightly higher high the next month.  Next week, I will look at the new data mining options indicators that still support the rounded top with a sharp decline unlikely for a number of weeks.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has retreated sharply from the recent spike, but still result in a rally similar to that off the Jan lows.

The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C [ETF Puts/Equity Calls], outlook two to four months) bearish sentiment has also declined sharply and continues to put in what appears to be a rounded bottom similar to late 2019.

Bonds (TNX).  Bearish sentiment in bonds finally saw a decent spike with the Mon sharp selloff and te pause in rates between 1.5 to 1.75 % is similar to Jan-Feb 2020 and may be preparing for a push to 2%.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment actually rose last week as bulls seem to be recognizing the threat of higher rates, but the rise in bearish sentiment may extend the rally as seen in Dec 2020.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) bearish sentiment continues to reflect the "no fear" attitude of the Robinhood traders and continues to move in a narrow range of low sentiment.

And the sister options Hedge Ratio bearish sentiment continues to be one of the more accurate indicators of ST market moves as near SELLs have preceded pullbacks while neutral readings have been enough to support bounces.

This week I wanted to look at the INT term BKX 3x ETFs (outlook two to four months) bearish sentiment. You have probably noticed the outperformance of the DJIA on days that int rates rise. Much of that is due to the gain in money center banks who profit from borrowing ST and lending LT and with the FED keeping ST rates near zero, higher LT rates increase profits. As a result,  from a low in Mar 2020 near 55 to a recent high over 120, the BKX has now outperformed the NDX and sentiment has reached the SELL level.

III. Options Open Interest

Using Thur closing OI, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected. Delta hedging may occur as reinforcement, negative when put support is broken or positive when call resistance is exceeded.  This week I will look out thru Mar 19 and EOM for SPX only.

With Fri close at SPX 3943, options OI for Mon is very small and is showing the potential for whipsaw movement between 3950 and 3900 with a slight bias to below 3925.

Wed has somewhat larger OI where SPX has very small OI between 3850 and 3950 with a small bias to the 3900-25 area.

For Fri PM, SPX has moderate put support up to 3900 and fairly large call resistance at 3950 and above that should contain any rallies.

For Mar 31 EOM, there is a very large strangle at SPX 3500 and 3900 where someone is betting on SPX being locked in that range.  It is very likely that there will be a pullback below 3900 by the EOM.

Using the GDX as a gold miner proxy closing at 33.1 is now up about 8% from its low at 30.5, nearing the 10% expected rally.

 
Currently the TLT is 136.1 with the TNX at 1.62%, where a steepening yield curve has pushed LT rates higher and bond prices lower.

IV. Technical / Other

This week I want to start off with a look at the Equity Puts & Calls, then complete the NDX ETFs with a look at the 3x ETFs.

The Equity Puts & Calls have both dropped sharply with the pullback in the NDX.  It's interesting to compare the three INT tops from Jan and Sept-Oct 2018 and Mar 2020.  Both Jan 2018 and Mar 2020 corrections started with high levels of speculation in both puts & calls and the result was a crash, while Sept-Oct started after a sharp decline in speculation as seen today, and the result was a more complex correction lasting several months.  Personally, I am expecting something more drawn out like late 2018.

As shown in the update for Mon, I cancelled the Buy for the NDX based on the 2x ETF indicator after noticing that they were only 5% of total $ volume and not enough to drive the market.  As shown below, the growth of the 3x ETFs has been huge the last three years.

The 3x ETF bearish sentiment also appears to show a Buy at the recent lows, but the upward slope had me concerned that part of sentiment trend was due to growth in volume, so I decided to use an NDX volume adjustment to replace the SPX adjustment (mostly to adjust for holiday volume and half days).

The result after the NDX volume adjustment looks more reasonable having normalized the ETF $ volume with the recent rise in bearish sentiment matching that of the Sept 2020 pullback of about the same %.  One thing that stands out is that the SQQQ/TQQQ ratio rose on much lower volume in the ETFs and looks more like May and Sept-Oct 2018 than Sept 2020.

Conclusions.   Last weeks ATH blew up the EW ending diagonals that most were looking for, forcing many to flip from bearish to bullish (again).  Many fail to realize that Eliot's work was developed in the 1920s and 30s as a way of estimating sentiment with the only technical requirement being the ability to draw a straight line and count to five.  However, with todays technology and database access you have to expect some short comings in the old ways.

 
Weekly Trade Alert.  There could be a small pullback toward SPX 3900 Mon-Tue as a setup for a rally into options exp Fri, but Fri should at least see a retest of the 3950 area with a 3% pullback to the mid-3800s the next two weeks.  Updates  @mrktsignals.

Investment Diary,  Indicator Primer,
 update 2020.02.07 Data Mining Indicators,
 update 2019.04.27 Stock Buybacks,
 update 2018.03.28 Dumb Money/Smart Money Indicators

Article Index 2019 by Topic, completed thru EOY 2020.02.04
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic

Long term forecasts

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